What the Brooker pub rent ruling means (Extract from the Morning Advertiser)
Charles and Leslie Brooker run the White Horse in the village of Hambrook near Bristol. They had a five-year non-assignable lease, free of tie on cider and a guest beer, which started in August 2001.
The non-indexed rent was set at £16,000 a year in 2001, a reduction of £3,839 from the previous rent. The Brookers and Enterprise Inns couldn’t agree on the new rent on an extension to the five-year lease and the case ended up in front of Judge Iain Hughes QC sitting as a Deputy High Court Judge.
His 11-page judgment makes for fascinating reading. In January 2008, Enterprise suggested the new rent should be £39,000 per annum and in December 2008 reduced the figure to £34,000/£35,000. By July 2009, the Enterprise rent bid had further deflated to £30,800.
In the event, the judge decided the rent should increase by £2,000 per annum to £18,000 (35% of the pub’s £51,000 per annum divisible profit balance), with the Brookers, who bid £9,000 two years ago, ordered to pay what was owed on a back-dated basis. What’s interesting here is the reasoning applied by the judge to come to his verdict. He finds fault, to a greater or lesser extent, with each of the expert witnesses.
While accepting a lot of his figures, he dismisses the reasoning of the Brookers’ accountant Brian Jacobs, who suggested the current RICS rent setting methodolgy is wrong. He found Jacobs “partisan, disputatious and unwilling to answer all the questions”. There was a complaint that he made “some broad assertions beyond his expertise”.
The judge also wasn’t prepared to entertain the Enterprise counsel Mark Wonnacott’s “hints and nudges” about the unreliability of the Brookers’ evidence on beer and cider purchases at the pub, and the credibility of their accounts. The judge found fault with Wonnacott’s criticisms of a lack of up-to-date accounts.
He noted “the tenants’ accounts are of little relevance” when the whole point in rent setting is determining what the hypothetical tenant would offer to pay in rent. He criticized Enterprise expert witness Peter Taylor for dropping “below his usual standards of objectivity” in suggesting that filling “the void created by the credit crunch” in recruiting licensees would be filled by those with redundancy payments.
And last but not least he found the two comparable transactions offered by Enterprise only of use in showing the degree of support and the increased bargaining power licensees have in the current economic climate. The Swan at Yate, let on 26 March this year, is being supported with a large initial rent reduction, a break clause, incentive discounts and a six-month cooling-off period, for example.
The second “comparable” pub was the King George VI at Filton and the judge decided it was not very comparable because of its suburban Bristol situation. In coming to his conclusion in setting a rent of £18,000 per annum, the judge ruled that the hypothetical tenant would take into account a “number of major factors affecting risk and confidence in the (pub) market”. He noted that beer sales have declined by 20% in the on-trade in the past five years.
At the White Horse, he thought a sensible view would be to assume beer sales would decline from the current 210 barrels a year by 10% rather than 5% suggested by Peter Taylor — giving a barrelage of 189 for 2009. He also thought that a hypothetical tenant would take into account the current gloomy economic climate.
On his list on things to make any tenant ultra-cautious were: high unemployment, the prospect of higher taxes on alcohol, the smoking ban, the lack of inexpensive capital in the economy and the 50-a-week pub closure rate. The judge said he was satisfied that the pub trade position is “much worse than anyone can ever remember”. Of 18 pubs identified in the White Horse’s neighbourhood he found 12 to be, or have been, in economic distress.
Nevertheless, the judge insisted he only took into account the long-term decline in beer sales, setting aside the other items that would make anyone cautious. Deutsche Bank analyst Geof Collyer says: “We would suggest that the judgment was a victory for the industry”.
I think he’s right in the sense that pub rents should reflect the state of the market and not exist in a vacuum. In the good times, some tenants over-bid on rent buoyed by confidence.
In more difficult economic times, tenants are likely to under-bid on rent, given an increased level of caution and the knowledge that there are fewer competitive bids around. Right now, it’s a tenant’s market.
Note:- You may wish to disagree with the writers comments, but they are their views and we need other opinions.